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OECD says Spain should look at mandatory pensions

SPAIN – The OECD has warned Spain that it needs to implement new reforms to prepare the country for the consequences of population ageing, including the possible introduction of compulsory second-pillar pension funds.

In its June 2001 policy brief, the OECD says recent pension reform in Spain is not likely to improve the viability of the public pension system.
It also claims that Spain’s social partners have not yet caught up with the “rather stark” long-term unsustainability of the country’s present pension arrangements.
Instead, the organisation says Spain must introduce a range of complementary measures to ensure adequate incomes for the elderly.

The Paris based organisation argues that one such reform may involve making the second pillar of the country’s pensions system mandatory, thus offsetting any reduction in the public pension regime.
The survey also calls for greater development of private pension plans in Spain, which it believes may add a “new dimension” to wage bargaining, by easing pressure for higher salaries if awards also cover pension rights.

“ A stronger funded pillar would partly offset the reduced generosity of the public pension regime and bring greater flexibility to the overall system. Further efforts should be devoted to improving the regulatory framework for the operation of pension funds, in particular to strengthen competition,” the report notes.

The OECD points out that the reforms are essential to prepare Spain for the difficulties that will stem from the ageing of its population.
“Although occurring relatively late, as from 2020-25, the demographic shock will be particularly severe and its expected impact on pensions has not been lessened by the 1997 and March 2001 reforms of the social security’s pay-as-you-go system,” the organisation says.

The OECD points out that Spain’s retirement first pillar is more generous than in most OECD countries, noting that the impact of this could be a rise of up to 8% of GDP in public expenditure until 2050.
While welcoming the creation by the Spanish government of a pension reserve fund and the implementation of a fiscal stability bill, the OECD argues that only by changing the calculation rates for pensions will Spain get to grips with the problem.
This, it says, could involve raising the number of contribution years for a full pension from the current level of 35 to 40 years.
A lowering of the earnings replacement rate across the board in Spain from the existing near 100% level would also help, the survey says.

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